Meck Executive Summary Essay

1593 words - 7 pages

Executive Summary

Statement of the Problem
LAB Pharmaceuticals does not have enough capital to finance the testing of Davanrik, an antidepressant drugs that has potential side effects relating to obesity. LAB approaches Merck & Co., Inc. (Merck) and asks the company to license Davanrik, as well as funding the clinical testing. Merck must decide whether or not to bid to license Davanrik and if so, at what price.
Discussion
Merck is facing patent expiration problem because most of its popular drugs are going to expire by 2002. Patent expiration will lead to a substantial loss of sales. Therefore, Merck must develop new compounds quickly to refresh its portfolio and counter the loss ...view middle of the document...

According to Davanrik failure probability analysis, the overall failure is 85.45%, which looks very high. However, the failure probability of phase III is very low, only 3.5%. This means that if Davanrik passed the first two phases, it would be almost certainly approved by FDA. In the case that Davanrik failed, the total loss would be $70 million; and this amount is less than four percent of the two billions dollars that Merck spends each year on research and development. In other words, the risk to license the drug is worth taking and the reward is very substantial. This means other pharmaceutical companies would be interested in licensing with LAB, and Merck should not bid the price too low.
LAB also benefits if it enter the licensing arrangement with Merck. Each phase has a positive expected value of milestone payment; and the total expected value of milestone payments to LAB is a positive $9.8 million (TN-5). This is a very good signal for LAB. Assume a 5% royalty fee on any cash flows that Merck receives from Davanrik, the total expected value of royalty payments to LAB would also have a positive value of $7.25 million (TN-6).
Recommendation
Merck should bid to license Davanrik at $12 million. This bid price is less than the $14 million expected value because Merck has high bargaining power; and it is also not too low to make Merck loose the competition. This decision is beneficial to both companies. Merck can save a lot of time and money in developing new drugs; it can then re-enter the market and gain revenue quickly. LAB’s royalty expected value is positive ($7.25 millions), and by licensing with Merck, LAB would be able to get the first FDA approval for its compound – Davanrik.

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